With more than 50% of its exports concentrated in oil and coal, the Colombian economy is highly vulnerable to the consequences of the energy transition, whether this takes place at national level or is the consequence of global dynamics. This highlights the tension between climate, fiscal and commercial stability. Hence the need for a holistic approach to the transition, and for public players to anticipate vulnerabilities.
While the ecological transition now affects all countries, its effects vary considerably according to the structure of their economies. Countries highly dependent on the extraction and export of natural resources are particularly vulnerable to financial and economic imbalances caused by a drop in these exports due to a decline in global demand, or by new fiscal or employment dynamics on a national scale. Such is the case in Colombia, where hydrocarbons account for over 55% of exports and the oil industry contributes 8% of total tax revenues. Yet, in January 2023, the government stopped granting new oil and gas exploration permits, while maintaining those already in force. This initiative follows on from the COP28 resolution to draw up a plan for phasing out fossil fuels. What are the possible consequences for the Colombian economy, and how can we reduce the tension between environmental ambitions and macroeconomic stability?
A Complex Energy Transition
Colombia is at a key point in its energy transition: the country’s oil reserves are estimated at 7.1 years of production, while gas reserves could last up to 6.5 years. Although the recent discovery of offshore natural gas could double this estimate to over 10 years, the total remains insufficient to guarantee the sustainability of the country’s energy supply. This situation shows the urgent need to diversify energy sources, all the more so as, while oil and coal exports still support the economy, natural gas remains crucial in meeting mainly domestic market needs.
This dependence on gas, which accounts for between 25% and 30% of domestic energy demand, is particularly marked during periods of drought amplified by the El Niño climatic phenomenon, when hydroelectricity – representing almost 70% of the electricity mix – suffers reduced capacity. To offset these deficits, the thermoelectric sector is increasing its natural gas use, sometimes leading to imports of liquefied natural gas (LNG), which is what happened in 2023. This dynamic and the rise in gas imports (+2,500% between 2022 and 2023) highlight the fragility of the Colombian energy system in the face of escalating climate impacts. Likewise, South Africa, also affected by the El Niño phenomenon, is seeing its hydroelectricity production destabilized, prompting the country to increase its consumption of natural gas to secure its energy supply.
The need to diversify is becoming increasingly urgent in Colombia, particularly as its coal exports, a historic pillar of the economy, are exposed to a potential decline in global demand after a new peak in 2023, according to forecasts by the International Energy Agency (IEA). As the world’s fifth-largest exporter, Colombia could face an erosion of revenues generated by this resource in the coming years.
In light of this, the country is making efforts to diversify its energy mix, by setting ambitious climate targets: to reduce its greenhouse gas emissions by 51% by 2030, and to reach 19 GW of non-conventional renewable energy capacity by 2050. However, financing this transition still poses a major obstacle. Like Peru, Colombia faces strict budgetary constraints, with a public debt/GDP ratio limited to 55%. Peru has introduced a law on fiscal responsibility and transparency, which sets the fiscal deficit at 1% of GDP and limits public debt to 30% of GDP. Both countries also face a relatively unfavorable international investment environment, which hampers their ability to mobilize foreign capital. Colombia must therefore reconcile ambitious climate objectives, growing climate-related vulnerability and structural dependence on fossil fuels to ensure a sustainable energy transition.
Anticipating Vulnerabilities, Seizing Opportunities
To identify possible options, the Ministries of Finance and Public Credit (MHCP), Planning (DNP) and the National University of Colombia (UNAL) developed the GEMMES Colombia model together with research teams from the French Development Agency (AFD). This tool can be used to simulate various scenarios and test policies for the transition to a low-carbon economy: it helps identify the macroeconomic vulnerabilities as well as the opportunities that these ecological transitions can generate. This empirical model shows that the country could face a significant depreciation of its currency and increased pressure on its foreign currency reserves, due to reduced global demand for its hydrocarbon exports.
Figure 1: Modeling the macroeconomic effects of Colombia’s energy transition
Source: Created by the authors
Policies focused on reindustrialisation, export diversification and integration into global value chains could mitigate the macroeconomic impacts of the transition, although they cannot eliminate them entirely. Transition offers Colombia an opportunity to diversify its productive structure, gradually integrate new green industries, strengthen its public infrastructure, create high-quality jobs and reduce its dependence on resource-based industries. This process could accelerate the country’s socio-economic development while mitigating certain negative effects.
The model also highlights the need to coordinate industrial, monetary and fiscal policies to overcome the challenges of reindustrialisation and diversification, while offering greater fiscal flexibility for investment in green projects.
Mobilizing Public and Private Financing
The GEMMES Colombia model also examined financing strategies for adaptation and mitigation policies, highlighting the economic implications of the investments required to achieve the country’s climate goals. According to the results, a mixed approach, combining private investment and public green bonds, seems the most promising to support Colombia’s climate ambitions. However, according to the model, even in the most favorable scenarios, the risks and fiscal pressures associated with the transition cannot be entirely eliminated.
Despite this fragile economic context in Colombia, solutions are emerging in favor of efficient management of natural resources through the establishment of an energy system focused on renewable sources and transition minerals. The 2022–2026 national plan emphasizes the diversification of mining production, focusing on the exploration and exploitation of key minerals such as copper and lithium, while respecting environmental standards and involving local communities.
At the same time, the country is focusing on the expansion of renewable energies to reduce its dependence on fossil fuels and meet its targets. This trend is part of a wider regional dynamic, as in Brazil, which, although historically dependent on hydroelectricity, has succeeded in diversifying its electricity mix, with wind power accounting for 10.9% and solar power for 6.9% of electricity production.
Mobilizing Transition Players
The final challenge is to mobilize. To understand the behavioral dynamics of the players involved, AFD’s research teams are supporting the deployment of a serious game, PowerShift, to encourage multi-stakeholder dialogue around Colombia’s climate action plan. This tool, based on the Commod method (companion modeling), helps reveal the “mental patterns” that influence stakeholders’ decisions and strategies, while enriching their understanding of macroeconomic issues.
By providing a platform for exploring the tensions and synergies at the core of the energy transition from social, economic and environmental angles, PowerShift stimulates high-level inter-ministerial dialogue. This process was reinforced by the mobilization of a wide range of players, from government representatives and civil society to private enterprise, with the participation of the Deputy Minister of Energy, senior officials from the Autonomous Committee for Fiscal Regulation (CARF), the Ministry of Housing, the Planning Department (DNP), the National Hydrocarbons Agency (ANH), as well as advisors from key ministries. In this context where Colombia’s energy future is being shaped, this tool could well become decisive in strengthening cooperation between the various actors of change.
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Figure 2. Distribution by sector of participants in strategy game workshops
